A very interesting article about excess manufacturing in China. So, a main factor in all this are abundant subsidies by the Chinese government. Where does the money come from that is used for all those subsidies?
This argument would make sense if China was on the same wealth levels as other developed countries. As that graph showed they're still poorer than Mexico. I've never understood the logic of comparing a country that was still poorer than NK less than 40 years ago to developed states like the US. The amount they spend on education, healthcare and social services have been increasing faster than almost any other countries over the past few decades.
It's also like Noah making it seem like there's a switch that can just be turned to change the economy while ignoring the housing market and other things that'll have to be fixed first
I think many people tend to forget that money itself is just an abstraction of economic value or wealth. Money itself is not wealth, wealth is useful goods and services. The current world that we live in is still predominantly material (which may change in the future decades with AI and virtual reality, I digress), this means as of now true wealth is basically material goods and physical services.
It is by this logic that China's strategy of relentless investment into production makes sense. What China is not doing right is neglecting to provide means for balanced consumption to take place, and distorting market pricing as a signalling mechanism to indicate usefulness of goods vis-a-vis each other.
China accounts for more manufactured goods output than the rest of the top 10 manufacturing countries combined. However is that really so outrageous? China has more population than the all of those countries (ex India) combined as well, which means the per Capita goods i.e. wealth produced by China is not significantly larger and probably smaller than the other countries. Furthermore, a large proportion of goods produced by China is exported to developed countries for their consumption. Imagine a case where China issues shopping vouchers that expires monthly to each household total equal to her monthly industrial and physical service output, every Chinese will be as or more wealthy in the real sense than people in developed countries now.
This is a nice summary with Liu’s article as a centerpiece. However given the power dynamics at play, intensifying in 2012, I think there is more Washington is playing for. There is the imperial activities of taking over Tibet, Inner Mongolia, and building of islands in the South China Sea. There is also unprecedented military buildup, IP tech transfers (especially the implicit variety), and human rights violations. It has been pointed out to me to not read Plenum directives from Western eyes. The priorities are not what we think they should be. Central to the CPC is political stability, social stability, and then state security. They know that their hold on the mandate to rule is fragile. Their notion of “common prosperity” has nothing to do with “a chicken in every pot,” but rather than everyone has a job to further the goals of the state. I believe what we are seeing is a multi-prong strategy for Cold War II, to be played the same way as it was against the Soviet Union. The central theme is to break their economy by stressing our own.
Tariffs, military spending, and pulling FDI from China forces China to inflate the currency, slow down their economy, and push their fiscal spending and monetary easing to maintain stability. Tell tale signs of its effect is the dollar to yuan conversion of 7.13, the highest in 5 years. Factor in that China is the largest net importer of food due to its population size (exemplified by the illegal fishing in international waters) and that its economy has followed the Asian economic growth model (financial repression on the public), it follows that as Chinese economic growth slows and government debt increases, then higher inflation should follow as the world cannot handle more exports due to global economic recession. Chinese households will then experience a negative income rate, which then pressures social stability, followed by political stability, as it did in the Soviet Union.
There is nothing really wrong with having an authoritative government in international circles — see Vietnam and Singapore — it just needs to participate in international harmony.
Isn't that a contradiction in terms? Doesn't the degree of authoritarianism correlate with aversion to the rule of law, and a preference for military dominance? Especially if combined with a superpower's military capacity?
And the CPC's historical rhetoric on using capitalistic methods to destroy the evil capitalist nations must be taken into account. Their overcapacity policy will do just that if it not resisted with tariffs and strict R&D export controls.
I think with what the CPC is doing, as frighteningly efficient as it appears, is far from resilient. They have decidedly run the system with high central controls and gives credit only to favored industries. Should conditions change, they will have difficulty to pivot to a new direction. Hence the oversupply problem. But in the same vein they have shortages in other areas. Food is one. But then personal luxury items such as furniture, health and beauty aids, which keep morale of the public high have no priority for the state. To do so will require liberalizing interest rates and capital controls— something that the CPC will be loathe to do for the sake of its own security. So they are locked into a cycle of inflating the currency to handle the debt. Pay more for imported raw materials. Hold down wages and slowly suffocate household purchasing power. Sure they want to develop a better service sector, but which industry will they sacrifice for it? Should they decide to begin a shooting war, I suspect all trade will be cut off from all of the industrialized countries. Thailand and Cambodia, I believe are monarchs. Vietnam is a communist country. None of the swing a stick and respect the sovereignty of others.
I sometimes wonder if China's state-owned banking system, by financing unprofitable manufacturing and construction projects on such a mammoth scale, is squandering the life savings of Chinese working people, upon which they are depending for support in old age. Could you maybe write about that?
Wow, Noah, what a brilliant piece of writing. I really want to know your reading list or is it just you contributing to real time economics with such expert perspectives. You do provide such a new perspective on Tariffs of China to lead to another wave of globalization emanating from countries where Chinese companies would re locate some of low value-added production. Today is a really good day for economics and thank you for the blog post.
Your suggestion to impose tariffs on Chinese components rather than Chinese brands to encourage Chinese companies to relocate high-value work to poorer countries is a sensible approach. However, from the perspective of these poorer countries, the immediate challenge is preventing the influx of Chinese imports from undermining their domestic industries—not due to wage differences, but because of China's existing state subsidies, production scale, and infrastructure.
An article in FT this morning said Chile has to shut down it's largest steel mill as a result of cheap Chinese imports. I suppose China's solution is to dump it's excess. This is a conundrum for the global south - for many China is their largest export partner and they must balance that relationship. Perhaps it would make sense for the US to step in and fill that role. Strategically speaking the western hemisphere should stick together.
Do you think the tariff regime could be designed to steer Chinese FDI to countries that are geopolitically friendly to the US? i.e., Mexico, Turkey, the Philippines, hopefully India, maybe Vietnam.
For military purposes it has some clear upsides. But for exactly that reason, I don’t know if the Chinese government would go along.
Your suggestion to impose tariffs on Chinese components rather than Chinese brands to encourage Chinese companies to relocate high-value work to poorer countries is a sensible approach. However, from the perspective of these poorer countries, the immediate challenge is preventing the influx of Chinese imports from undermining their domestic industries—not due to wage differences, but because of China's existing production scale and infrastructure.
Tech transfer in China occurred in part due to government policy forcing foreign companies to work with local partners. Don't expect the same thing to happen in the same way when China goes to manufacture in other countries, unless regulators set up the same local partner regulation tricks that China did.
There's a very good reason: smaller countries simply don't have the hegemonic market power that China did. China had a population of 1.4 billion with a commensurately-sized market and workforce. Only India can match up to even a fraction of that. So they had strong bargaining power to set the terms of entry. They used it. In many industries in China, investment was closed to foreign entities, and so foreign investors would be forced to enter in to a "China Joint Venture" with a Chinese counterpart if they wanted to enter China at all. This created at least a small effect of knowledge spillover in the Auto industry (see https://sccei.fsi.stanford.edu/china-briefs/how-much-do-chinas-joint-venture-requirements-promote-knowledge-transfers-domestic) and may have had larger effects in many other industries. In fact, joint venture requirements in the past were often explicitly paired with technology transfer requirements that force the foreign partner to transfer technology to the joint venture firm, with its part-ownership by China-based entities (https://voxchina.org/show-3-115.html).
Why do you say India is "only a fraction"? Their economic size and population now isn't much different from China's in the recent past when China was able to enforce those requirements.
And Indonesia isn't exactly sparsely populated either.
True, but that doesn't change the situation for many other countries. It's also the case that none of these countries, India included _have actually_ yet implemented the framework China has that made tech transfer a success in China. What I said was that there's no good reason to expect what happened in China to happen in other places unless those places also adopt the tech transfer rules China did.
While you suggest that China could have already uplifted its population - if it wanted to, perhaps they've simply been focused on exports because that is how the economy has grown. International companies came to China and set up plants for export. This has been a hugely successful strategy... for China. If you're doing a great job, you keep doing it.
Local consumers have benefited, but there is still a long way to go before the population (outside the major cities) is on par with the major developed countries.
Given China's manufacturing capability, it could do as you suggest (set up in other countries for export to the rest of the world), AND promote improvements in the standard of living of its own population. It could do this by introducing a Universal Basic Income. This would give the people the money they need to demand the goods and services that their domestic industrial base in capable of producing.
China is on the cusp of 'having it all'. It could become a world force for 'good'... if it can keep its military in check. The Chinese can also be patient... so why not let Taiwan sit for another 100 years, and see what happens.
If Xi took this path, he'd be the most lauded human in history (inside and outside China). He would not have to write his own plaudits and manifestos and force them on the population... they would be written about him for generations.
Very good analysis. The only thing I disagree with is why a globalization 2.0, while perhaps less damaging than the first, would be a good thing at all for the U.S. The primary mandate of the U.S. government should be to maximize the safety and well-being of its citizens. I am not sure how allowing production of critical goods and products and outsourcing of important industries to other countries (even if it's not China) helps the U.S. That's nice that a new type of globalization away form China might employ workers in and develop other countries, but the U.S. government should focus on American workers and domestic production, not helping the rest of the world. We should be doing everything we can to incentivize production within the U.S. Just the way I feel.
It’s the best article I’ve read about why US and EU imposed tariffs on China. I like the article for taking the perspectives of Chinese consumers and developing countries such as Vietnam and Morocco that could benefit as a result of the tariff circumvention.
People not reading this article might have thought that tariff is just an attempt to suppress growth in China. But it’s in fact for the sake of Chinese consumers. Thanks!!
Tariffs = giving up on actually competing, and trying to crawl back into your shell. China is a very big boat - you might rock it a little, but they set their own course. The less competitive we get, the more they'll take global business away from us. (As if they need any help as it is.)
There are already colossal trade barriers in place. If there weren't, quite a few Americans would be zipping around in $10k electric cars. Barriers like this protect inefficient American companies, causing them to take easy profits in a protected market rather instead of trying to compete globally. We will not sell a single damn car in Africa at this rate.
We're already losing, and your response is to cry about a playing field already tilted in our favor. Pathetic! Grow a pair. I don't want to live in a country of losers like you.
A very interesting article about excess manufacturing in China. So, a main factor in all this are abundant subsidies by the Chinese government. Where does the money come from that is used for all those subsidies?
Taxes (value-added tax is the most important), plus borrowing...
But borrowing can't go on indefinitely, I suppose...
They also spend very little on health care and pension/social security, relative to other developed economies.
If the US wanted to cut SS and health spending by 50% we could also massively subsidize production.
This argument would make sense if China was on the same wealth levels as other developed countries. As that graph showed they're still poorer than Mexico. I've never understood the logic of comparing a country that was still poorer than NK less than 40 years ago to developed states like the US. The amount they spend on education, healthcare and social services have been increasing faster than almost any other countries over the past few decades.
It's also like Noah making it seem like there's a switch that can just be turned to change the economy while ignoring the housing market and other things that'll have to be fixed first
I think many people tend to forget that money itself is just an abstraction of economic value or wealth. Money itself is not wealth, wealth is useful goods and services. The current world that we live in is still predominantly material (which may change in the future decades with AI and virtual reality, I digress), this means as of now true wealth is basically material goods and physical services.
It is by this logic that China's strategy of relentless investment into production makes sense. What China is not doing right is neglecting to provide means for balanced consumption to take place, and distorting market pricing as a signalling mechanism to indicate usefulness of goods vis-a-vis each other.
China accounts for more manufactured goods output than the rest of the top 10 manufacturing countries combined. However is that really so outrageous? China has more population than the all of those countries (ex India) combined as well, which means the per Capita goods i.e. wealth produced by China is not significantly larger and probably smaller than the other countries. Furthermore, a large proportion of goods produced by China is exported to developed countries for their consumption. Imagine a case where China issues shopping vouchers that expires monthly to each household total equal to her monthly industrial and physical service output, every Chinese will be as or more wealthy in the real sense than people in developed countries now.
This is a nice summary with Liu’s article as a centerpiece. However given the power dynamics at play, intensifying in 2012, I think there is more Washington is playing for. There is the imperial activities of taking over Tibet, Inner Mongolia, and building of islands in the South China Sea. There is also unprecedented military buildup, IP tech transfers (especially the implicit variety), and human rights violations. It has been pointed out to me to not read Plenum directives from Western eyes. The priorities are not what we think they should be. Central to the CPC is political stability, social stability, and then state security. They know that their hold on the mandate to rule is fragile. Their notion of “common prosperity” has nothing to do with “a chicken in every pot,” but rather than everyone has a job to further the goals of the state. I believe what we are seeing is a multi-prong strategy for Cold War II, to be played the same way as it was against the Soviet Union. The central theme is to break their economy by stressing our own.
Tariffs, military spending, and pulling FDI from China forces China to inflate the currency, slow down their economy, and push their fiscal spending and monetary easing to maintain stability. Tell tale signs of its effect is the dollar to yuan conversion of 7.13, the highest in 5 years. Factor in that China is the largest net importer of food due to its population size (exemplified by the illegal fishing in international waters) and that its economy has followed the Asian economic growth model (financial repression on the public), it follows that as Chinese economic growth slows and government debt increases, then higher inflation should follow as the world cannot handle more exports due to global economic recession. Chinese households will then experience a negative income rate, which then pressures social stability, followed by political stability, as it did in the Soviet Union.
There is nothing really wrong with having an authoritative government in international circles — see Vietnam and Singapore — it just needs to participate in international harmony.
Isn't that a contradiction in terms? Doesn't the degree of authoritarianism correlate with aversion to the rule of law, and a preference for military dominance? Especially if combined with a superpower's military capacity?
And the CPC's historical rhetoric on using capitalistic methods to destroy the evil capitalist nations must be taken into account. Their overcapacity policy will do just that if it not resisted with tariffs and strict R&D export controls.
I think with what the CPC is doing, as frighteningly efficient as it appears, is far from resilient. They have decidedly run the system with high central controls and gives credit only to favored industries. Should conditions change, they will have difficulty to pivot to a new direction. Hence the oversupply problem. But in the same vein they have shortages in other areas. Food is one. But then personal luxury items such as furniture, health and beauty aids, which keep morale of the public high have no priority for the state. To do so will require liberalizing interest rates and capital controls— something that the CPC will be loathe to do for the sake of its own security. So they are locked into a cycle of inflating the currency to handle the debt. Pay more for imported raw materials. Hold down wages and slowly suffocate household purchasing power. Sure they want to develop a better service sector, but which industry will they sacrifice for it? Should they decide to begin a shooting war, I suspect all trade will be cut off from all of the industrialized countries. Thailand and Cambodia, I believe are monarchs. Vietnam is a communist country. None of the swing a stick and respect the sovereignty of others.
I sometimes wonder if China's state-owned banking system, by financing unprofitable manufacturing and construction projects on such a mammoth scale, is squandering the life savings of Chinese working people, upon which they are depending for support in old age. Could you maybe write about that?
I will at some point, yeah!
Wow, Noah, what a brilliant piece of writing. I really want to know your reading list or is it just you contributing to real time economics with such expert perspectives. You do provide such a new perspective on Tariffs of China to lead to another wave of globalization emanating from countries where Chinese companies would re locate some of low value-added production. Today is a really good day for economics and thank you for the blog post.
Your suggestion to impose tariffs on Chinese components rather than Chinese brands to encourage Chinese companies to relocate high-value work to poorer countries is a sensible approach. However, from the perspective of these poorer countries, the immediate challenge is preventing the influx of Chinese imports from undermining their domestic industries—not due to wage differences, but because of China's existing state subsidies, production scale, and infrastructure.
An article in FT this morning said Chile has to shut down it's largest steel mill as a result of cheap Chinese imports. I suppose China's solution is to dump it's excess. This is a conundrum for the global south - for many China is their largest export partner and they must balance that relationship. Perhaps it would make sense for the US to step in and fill that role. Strategically speaking the western hemisphere should stick together.
Do you think the tariff regime could be designed to steer Chinese FDI to countries that are geopolitically friendly to the US? i.e., Mexico, Turkey, the Philippines, hopefully India, maybe Vietnam.
For military purposes it has some clear upsides. But for exactly that reason, I don’t know if the Chinese government would go along.
Your suggestion to impose tariffs on Chinese components rather than Chinese brands to encourage Chinese companies to relocate high-value work to poorer countries is a sensible approach. However, from the perspective of these poorer countries, the immediate challenge is preventing the influx of Chinese imports from undermining their domestic industries—not due to wage differences, but because of China's existing production scale and infrastructure.
How hard would it be to impose tariffs on the value added by the target country? Is it near-impossible?
This is the same thing as taxing Chinese components! It's hard but not impossible.
Tech transfer in China occurred in part due to government policy forcing foreign companies to work with local partners. Don't expect the same thing to happen in the same way when China goes to manufacture in other countries, unless regulators set up the same local partner regulation tricks that China did.
I don't see why they wouldn't.
There's a very good reason: smaller countries simply don't have the hegemonic market power that China did. China had a population of 1.4 billion with a commensurately-sized market and workforce. Only India can match up to even a fraction of that. So they had strong bargaining power to set the terms of entry. They used it. In many industries in China, investment was closed to foreign entities, and so foreign investors would be forced to enter in to a "China Joint Venture" with a Chinese counterpart if they wanted to enter China at all. This created at least a small effect of knowledge spillover in the Auto industry (see https://sccei.fsi.stanford.edu/china-briefs/how-much-do-chinas-joint-venture-requirements-promote-knowledge-transfers-domestic) and may have had larger effects in many other industries. In fact, joint venture requirements in the past were often explicitly paired with technology transfer requirements that force the foreign partner to transfer technology to the joint venture firm, with its part-ownership by China-based entities (https://voxchina.org/show-3-115.html).
Why do you say India is "only a fraction"? Their economic size and population now isn't much different from China's in the recent past when China was able to enforce those requirements.
And Indonesia isn't exactly sparsely populated either.
True, but that doesn't change the situation for many other countries. It's also the case that none of these countries, India included _have actually_ yet implemented the framework China has that made tech transfer a success in China. What I said was that there's no good reason to expect what happened in China to happen in other places unless those places also adopt the tech transfer rules China did.
While you suggest that China could have already uplifted its population - if it wanted to, perhaps they've simply been focused on exports because that is how the economy has grown. International companies came to China and set up plants for export. This has been a hugely successful strategy... for China. If you're doing a great job, you keep doing it.
Local consumers have benefited, but there is still a long way to go before the population (outside the major cities) is on par with the major developed countries.
Given China's manufacturing capability, it could do as you suggest (set up in other countries for export to the rest of the world), AND promote improvements in the standard of living of its own population. It could do this by introducing a Universal Basic Income. This would give the people the money they need to demand the goods and services that their domestic industrial base in capable of producing.
China is on the cusp of 'having it all'. It could become a world force for 'good'... if it can keep its military in check. The Chinese can also be patient... so why not let Taiwan sit for another 100 years, and see what happens.
If Xi took this path, he'd be the most lauded human in history (inside and outside China). He would not have to write his own plaudits and manifestos and force them on the population... they would be written about him for generations.
I love reading all of your stuff, Noah. You have a gift when it comes to writing.
China centric globalization needs to be consigned to the dustbin of history.
Very good analysis. The only thing I disagree with is why a globalization 2.0, while perhaps less damaging than the first, would be a good thing at all for the U.S. The primary mandate of the U.S. government should be to maximize the safety and well-being of its citizens. I am not sure how allowing production of critical goods and products and outsourcing of important industries to other countries (even if it's not China) helps the U.S. That's nice that a new type of globalization away form China might employ workers in and develop other countries, but the U.S. government should focus on American workers and domestic production, not helping the rest of the world. We should be doing everything we can to incentivize production within the U.S. Just the way I feel.
It’s the best article I’ve read about why US and EU imposed tariffs on China. I like the article for taking the perspectives of Chinese consumers and developing countries such as Vietnam and Morocco that could benefit as a result of the tariff circumvention.
People not reading this article might have thought that tariff is just an attempt to suppress growth in China. But it’s in fact for the sake of Chinese consumers. Thanks!!
Tariffs = giving up on actually competing, and trying to crawl back into your shell. China is a very big boat - you might rock it a little, but they set their own course. The less competitive we get, the more they'll take global business away from us. (As if they need any help as it is.)
There are already colossal trade barriers in place. If there weren't, quite a few Americans would be zipping around in $10k electric cars. Barriers like this protect inefficient American companies, causing them to take easy profits in a protected market rather instead of trying to compete globally. We will not sell a single damn car in Africa at this rate.
We're already losing, and your response is to cry about a playing field already tilted in our favor. Pathetic! Grow a pair. I don't want to live in a country of losers like you.